U4 AOS 1

Question 1

Bad Debts (E)

Answer 1

A debt that must be written off as irrecoverable because it has been confirmed that the Account Receivable is unable to pay due to liquidation or bankruptcy.

Question 2

Doubtful Debts

Answer 2

A debt that is unlikely to be collected in the future but has not yet been written off as it has not been confirmed that the Accounts Receivable is unable to pay.

Question 3

Qualitative Characteristics of Bad and Doubtful Debts

Answer 3

Recording Bad and Doubtful Debts before they occur is a problem – they are an estimate and cannot be verified (until they actually occur).

If we don’t acknowledge that some debts may not be received we would not be faithfully representing the true state of affairs for the business – i.e. overstating our profit and accounts receivable.

In addition, it is also necessary an owner has all relevant information that may affect decision making.

Reporting doubtful debts is less inaccurate than simply reporting Accounts Receivable in full.

Question 4

Ethical Doubtful Debts

Answer 4

The omission of doubtful debts may also be unethical as it would overstate the Accounts Receivable and Net Profit misleading information.

Question 5

Accounting Assumption Doubtful Debts

Answer 5

Where the bad debt occurs in the same period as the credit sale rom which is has come, the Income Statement will also uphold the accrual basis assumption as the expenses incurred (bad debt) will be measured against revenue earned (credit sale) for the period.

Question 6

How can a business avoid bad debts?

Answer 6

Offer discounts for fast settlement.
Send invoices promptly.
Conduct extensive credit checks.
Send reminder notices (statement of account).
Employ a debt collection agency.
Deny access to credit facilities.
Develop a strong relationship with each customer.
Appoint an Accounts Receivable clerk to manage AR.

Question 7

Straight line method

Answer 7

Assumes that Non-Current Assets contribute evenly to earning revenue in each reporting period.
That is, the depreciation expense is the same amount from period to period.

Question 8

Accumulated Depreciation (-A)
on the balance sheet

Answer 8

value of a Non-Current Asset that has been incurred over its life thus far.

Question 9

Straight line formula

Answer 9

Depreciation Expense (p.a.) = Historical Cost (HC) – Residual Value/ Useful Life (UL)

Question 10

depreciation affect on accounting equation

Answer 10

Therefore the affect on the Accounting Equation is:
Assets decrease (via the Accumulated Depreciation account) by $1,500
Owners Equity decreases (via Depreciation Expense) by $1,500

Question 11

Depreciation QCs

Answer 11

Accrual Basis Assumption.
Expense should be recorded when incurred.
Period Assumption.
Depreciation expense is the cost incurred within a current Period. The Reporting Period assumption requires that revenue earned in each period is matched against the expenses incurred over the same period.
Going Concern Assumption.
Asset value must be recorded as they have a future economic benefit.
Relevance.
Accumulated depreciation will influence managers decisions to buy or sell NCA’s.
Faithful Representation.
Residual value and useful life are both estimates.
Verifiability.
Unable to verify depreciation with a source document.

Question 12

Reducing balance why choose? for which asset

Answer 12

An Asset with moving parts is likely to be more productive when new. Such assets are more efficient in their early years and therefore contribute more to earning revenue when it they are newer.
allocates more depn in the early years of an asset’s life and less depreciation in its later years.

Question 13

Formula of Reducing Balance Method

Answer 13

Depreciation expense (p.a) = Carrying Value x Depreciation Rate
Depreciation expense is higher in the earlier periods and reduces over time because the carrying value decreases.

Question 14

Selecting a depreciation method

Answer 14

key factor is the revenue earning pattern of the asset:
Evenly – Straight Line Method.
Reduction in efficiency over time – Reducing Balance Method.

Question 15

Ethicalness when selecting depreciation

Answer 15

Rffect on Net Profit should not be considered when selecting an appropriate method. Choosing the method that will result in the highest net profit without considering the revenue earning pattern is unethical as it may mislead the general public or investors deteriorating social outcomes for the business.

Question 16

What causes a profit on disposal?

Answer 16

A profit is caused by an over-depreciation of the asset during its useful life. Understated residual value, useful life and understated carrying value (less than proceeds from disposal)

Question 17

What causes a loss on disposal?

Answer 17

A loss on disposal is caused by an under-depreciation of the asset during its useful life. Overstated residual value, useful life and overstated carrying value (greater than proceeds from disposal.

newer, technologically superior model has arrived in the market. OR the old model is not in demand.

Question 18

balance day adjustments

Answer 18

Balance day adjustments ensure that the reports include all information that is useful for decision
marking, because it report revenues earned and expenses incurred in the current financial period.

These entries are necessary to adjust the revenue and expense accounts to the amounts earned and incurred for the period. This ensures that both revenues and expenses are faithfully measured so that an accurate profit can be determined.

Question 19

Prepaid Expense (A)

Answer 19

An expense paid in advance that has not yet been used/consumed/incurred.
It is an asset because the transaction has created a future economic benefit that will be realised when the prepaid asset had been consumed.

Question 20

Accrued Expense (L)

Answer 20

expenses that have been incurred during a period but not yet paid.
a liability bc the transaction has created a future obligation that will need to be fulfilled

Question 21

Unearned Revenue (L)

Answer 21

A current liability that arises when cash is received in advance for a revenue that is yet to be earned.

Question 22

Accrued Revenue (A)

Answer 22

A current asset which arises when revenue has been earned but cash is yet to be received.

the amount owing to the business should be treated as a current asset as the business will gain a future economic benefit.

Question 23

Adjusted Trial Balance

Answer 23

a trial balance prepared after the recording
of balance day adjustments has been completed

the purpose of a preadjustment trial balance is to act as a double checking mechanism by checking that total debits equal total credit entries in the general ledger accounts. This helps ensure that the double entry processes have been done accurately and identifies if any recording errors have been made so corrective action can be taken.

Question 24

Allowance for Doubtful Debts

Answer 24

Is a negative current asset account based on predictions of future bad debts. This allowance is made in recognition of the risk attached to selling goods on credit.

• based on a percentage of credit sales made during a period.
• acknowledges management does not expect to collect all amounts owing by accounts receivables.
• recognises expected loss of economic benefits.

Question 25

Allowance for Doubtful Debts QC

Answer 25

Allowance for DD cannot satisfy the demands of verifiability. it’s simply an estimate of future events.
However, it does comply with relevance because it recognises the potential for credit sales not being collected. This may more faithfully represent the situation faced by a business.

Question 26

Depreciation QCs

Answer 26

As depreciation is an expense it’s a relevant item in relation to the demand for an accurate profit being determined for the period. Depreciation represents
an expense incurred that is required to be reported in the Income Statement in order to determine an accurate profit for the period.

However, there is also demand for information to be verifiable, and supported by evidence. As depreciation is based on 2 estimates, residual value and useful life, the amount written off each year may be questionable as it cannot be verified by documentary evidence.

However, the demands of relevance outweigh the concern of not being able to satisfy verifiability, it is better to have an estimated amount written off than not include depreciation in the income statement at all.

Question 27

Unearned Revenue
rent

Answer 27

Receiving unearned revenue:
Bank Dr
Unearned Rev Cr
GST Clear Cr
rent revenue received in advance - rec.

Unearned revenue has been earned:
Unearned Rev Dr
Rent Rev Cr
Adjusting entry to record one month’s revenue earned - memo x

Question 28

Unearned Revenue: Deposits

Answer 28

1) Receiving the deposit:
Bank Dr
Unearned Sales Rev Cr
Sales revenue received in advance - Rec. x

2) When goods are supplied:
Unearned Sales Rev Dr
Sales Rev Cr
Sales revenue earned this period - Rec.

3) Additional Cash is Received:
Bank Dr
Sales Rev Cr
GST Clear Cr
Cost of sales Dr
Inventory Cr

Question 29

Accrued Revenue (in interest)

Answer 29

1) revenue is earned but not received
Accrued Interest Rev Dr
Interest Rev Cr
Adjusting entry to record interest earned but not received - memo

2) Interest received
Bank Dr
Accrued Interest rev Cr
Interest Rev Cr
Interest received - inv x

receive interest for the new period and the outstanding accrued interest.

Question 30

Prepaid expenses rent

Answer 30

1) Expense paid in advance
Prepaid Rent Dr
GST Clear Dr
Bank Cr
12 months of rent paid in advance - (Rec. x)

2) Recognise expense is consumed
rent expense Dr
Prepaid Rent Cr
Adjusting entry to record 5 months of rent expense

Question 31

Accrued Expense electricity

Answer 31

1) Expense incurred but not paid
Electricity Expense Dr
Accrued Electricity Expense Dr
Adjusting entry for electricity unpaid - memo x

2) Paid expense including not just accrued expenses
Accrued Electricity Expense Dr
Electricity expense Dr
GST Clearing Dr
Bank Cr
payment of electricity includes accrued electricity from the previous period (memo x)

Question 32

Bad and Doubtful Debts

Answer 32

1) Creating an allowance for doubtful debts:
Bad debts Dr
Allowance for DD Cr
Adjusting entry to create an allowance for doubtful debts of 2% of credit sales (memo x)

2) Writing off Bad debts
Allowance for DD Dr
GST CLearing Dr
Accounts Receivable - x Cr
Account written off as irrecoverable due to AR’s bankruptcy- memo

2) Part of the debt is received (transaction may be separate if different source doc or date)
Bank Dr
Allowance for DD Dr
GST Clearing Dr
AR Cr
Account written off as irrecoverable after receiving 40c for each dollar rec.

3) Adjusting bad debts Allowance
*Use the ledger to balance it out from the last period’s balance.
Bad debts Dr
Allowance for DD Cr

Question 33

Comparing depreciation Methods

Answer 33

The total amount of depreciation allocated over the life of the asset is exactly the same under both methods. The only difference between the 2 depreciation methods is the amount of cost to be allocated in a particular period.